For-profit schools in cross hairs

Article by: JIM SPENCER and PATRICK KENNEDY

Star Tribune s taff w riters

June 27, 2012 - 11:07 PM

WASHINGTON - Dozens of programs at Minnesota's for-profit colleges and career training programs are struggling to meet parts of a federal program designed to help students get more bang for bucks borrowed from the federal government, a Department of Education report shows.

Schools that fail to meet at least one of three new criteria for the repayment of taxpayer-backed student loans could eventually lose the right to those loans, which now make up the majority of income at for-profit colleges.

Three programs at Brown College in Mendota Heights failed to meet any of the debt criteria, the report showed. One has already been canceled; two others continue, school officials said.

"We are working to check the Department of Education ... data for accuracy," Brown President Michele Ernst said in a statement Wednesday. "The data is from 2008, so it doesn't represent changes we've made to our programs since then to better meet job market demands."

The federal report won't be used to sanction any schools, federal officials said. But it offers a snapshot of student debt issues that must be addressed because for-profit colleges often cost more than public schools and federal loan default rates are significantly higher for for-profit college students, leaving U.S. taxpayers on the hook long after the for-profit schools have booked student loans as income.

To address the situation, new "gainful employment" rules say that starting in 2015 federal loans can be taken away from programs that saddle students with more debt than their training enables them to repay.

The Education Department report showed that almost two-thirds of students in 31 Minnesota programs weren't repaying their loans on time. Students in 35 programs were paying more than 30 percent of their discretionary income for student loans. And students in 13 programs paid more than 12 percent of their total earnings for student debt.

Exactly what that means remains a matter of fierce debate.

"The Education Department wants to prevent people from enrolling in schools that don't provide a high level of educational training," said Terry Hartle, a vice president at the American Council on Education. "Everyone wants to crack down on really bad schools. How you identify really bad schools is difficult. This methodology may or may not be meaningful."

Nationally, just 5 percent of schools had programs that failed to meet the three federal student debt guidelines. Meanwhile, only 35 percent met all three, while 31 percent met two; 29 percent met just one.

Big Minnesota-based for-profit schools like Capella University and Walden University, which offer mostly online education, generally performed well. But Capella had six programs with loans repayment rates less than 35 percent, and Walden had five.

The report also measured the median amount of federally guaranteed loans per student per program. In Minnesota, the top nine were for Walden programs. First on the list was a master's degree in curriculum and instruction with a median loan value of $22,167.

Capella filed papers with the Securities and Exchange Commission on Tuesday explaining that the loan-to-income ratios listed for its students in the report might actually have been too favorable.

"We need to connect with the [education] department," Mike Buttry, Capella's vice president of communications, said in an interview Wednesday. "We want accurate information." Buttry said student debt figures may be understated. Income figures, he said, "demonstrate the value of a Capella degree."

While Capella had no programs that failed all three debt tests, publicly traded colleges with programs that didn't pass muster saw their stocks suffer with the report's release.

Career Education Corp., Brown College's parent company, had programs fail at 10.6 percent of its schools, according to Piper Jaffray analyst Peter Appert, and Corinthian Colleges, another company with multiple subsidiaries, had programs fail at 18.3 percent of its schools. Stock in both schools went down.

Overall, however, the national failure rate was less than expected, Appert said. The Education Department study found 193 failing programs in 93 schools in a review of 3,695 programs at 1,335 schools nationwide. Those numbers included 593 programs at 67 schools in Minnesota.

"Gainful employment is turning out to be relatively benign," Appert explained in a phone interview from San Francisco. He called the new regulations "a wakeup call for an industry that grew too fast with standards that were too low." Faced with potential sanctions, Appert said, the industry has largely fixed itself.